Solicitors’ fees for unsuccessfully opposing a winding-up petition allowed in priority to Liquidators’ fees, but not in priority to Administrators’ fees

Although there is case precedent – Re a Company (No 004055 of 1991) [1991] 1 WLR 1004 – for allowing the company’s costs for seeking to strike out a winding-up petition to be a Liquidation expense, personally this seemed a new thought to me: that the category of Liquidation expenses at R4.218(3)(h), “the costs of the petitioner, and of any person appearing on the petition whose costs are allowed by the court”, could include the insolvent company’s costs for seeking to avoid the winding-up order.

Of course, these pre-Liquidation costs do not automatically rank in priority to the Liquidator’s fees – they have to be “allowed by the court” – but it seems to me that this case highlights yet more pre-appointment liabilities of which Liquidators need to be aware.

In contrast, the judge decided that the solicitors’ fees should not be allowed as an Administration expense.

It is perhaps important to note that the Liquidators did not object to the result (because there was no Administration surplus from which to discharge the costs). However, the judgment provides some valuable comment on the application of the Lundy Granite principle in Administrations and what kind of costs the court will allow as Liquidation expenses.

Background: In December 2009, Portsmouth City Football Club Limited (“the company”) instructed solicitors to act for it in connection with a winding-up petition presented by HMRC. The solicitors continued to act on the matter until c.12 February 2010 when the company’s instructions were withdrawn. At that time, the petition had reached an appeal stage. Administrators were appointed on 26 February 2010 and thus the winding-up petition was suspended automatically. On considering the Administrators’ (revised) proposals, the creditors approved that the company should exit Administration via Compulsory Liquidation. The original HMRC winding-up petition was restored to a hearing on 24 February 2011 when the winding-up of the company was ordered and this resulted in the ending of the Administration.

The company’s former solicitors had received part-payment from a person connected with the company, but there remained c.£267,000 owing in fees and disbursements. The solicitors sought a determination that the costs should be an expense of the Administration; alternatively, that they should be an expense of the Liquidation; and further alternatively, that they should be an expense of the CVA (which existed whilst the company was also in Administration).

Are the solicitors’ fees an Administration expense?

The solicitors’ first argument was that the court could order that the costs be paid as an Administration expense under S51 of the Senior Courts Act 1981. In part, that section states that: “the court shall have full power to determine by whom and to what extent the costs [of proceedings] are to be paid”. Morgan J decided that this did not help the solicitors: “An order for costs under section 51 is for the benefit of the company. At most, it would involve a payment by the company to the company. It would not involve the administrators making a payment to the solicitors… Section 51 does not authorise the court to order the administrators to make a payment to the solicitors. As I have explained, they did not incur costs and no order for costs is to be made in their favour” (paragraph 68).

Another argument was that the court could order that the costs be “treated” as an Administration expense. In considering this, Morgan J reviewed the list of Administration expenses at R2.67 and reflected on the impact of the Lundy Granite principle, i.e. a liability under a contract entered into before Liquidation could be treated as if it were an expense of the Liquidation, where the Liquidator had retained the benefit of the contract for the purposes of the winding-up. He stated: “If the company is under a liability to pay a sum under the Lundy Granite principle, then it seems to me that, as a matter of fact, payment of such a sum will be a necessary disbursement within rule 4.218(3)(m)” (paragraph 91) and thus it followed that “a liability which is payable in full under the Lundy Granite principle can be a necessary disbursement within rule 2.67(1)(f). Further, such a liability can be a liability incurred by the administrator under rule 2.67(1)(a)” (paragraph 93).

So were the solicitors’ costs in this case a liability under the Lundy Granite principle? Morgan J decided that they were not, as the company’s contract of retainer of the solicitors ended before the Administration began and the Administrators “did not do anything to elect to retain the benefit of the contract of retainer for the purposes of the administration. Further, if they had so elected, they would only have been liable for charges in relation to the period from the time of such election” (paragraph 95).

Morgan J concluded that the solicitors’ fees came under no category of Administration expenses per R2.67 and they were not to be “treated” as if they came within that rule.

Are the solicitors’ fees a Liquidation expense?

One of the significant differences between R2.67 for Administration expenses and R4.218 for Liquidation expenses is that the latter includes (at (3)(h)): “the costs of any person appearing on the petition whose costs are allowed by the court”. Morgan J stated: “The company comes within the reference to ‘any person’ in rule 4.218(3)(h). The company incurred costs in that it contracted, before the presentation of the winding up petition, to pay fees to the solicitors. Thus, the decision for the court is whether to ‘allow’ the costs of the company as costs within rule 4.218(3)(h)” (paragraph 115).

“On the evidence and the submissions in this case, and having regard to the fact that there was no real opposition to this course, I consider that I am able to hold: (1) the solicitors were duly instructed on behalf of the company; (2) those directing the affairs of the company at the relevant time considered that it was in the best interests of the company for the company to oppose the winding up petition in the way, and on the grounds, on which it did; (3) those directing the company were not acting in their own interests in a way which was in conflict with the best interests of the company; (4) the work done by the solicitors on behalf of the company was in fact in the best interests of the company; (5) there is no factor which would justify the court in refusing to allow the company’s costs to be an expense of the liquidation” (paragraph 128).

Which elements of the solicitors’ fees are Liquidation expenses?

In addition to the solicitors’ fees and disbursements directly related to the opposing of the winding-up petition, Morgan J considered whether the solicitors’ other fees and disbursements also should be allowed:

Costs incurred prior to the presentation of the petition: allowed to the extent that the “work ultimately proved of use and service in the application which the company later made to strike out the petition” (paragraph 133).

Costs in dealing with another creditor’s petition: allowed from the date that this petition and HMRC’s petition were ordered to be considered together; work prior to this event related to a separate matter.

Costs in advising on a possible application for a S127 validation order: Morgan J felt that these costs were “very closely bound up” with the costs of dealing with the HMRC petition and thus they were allowed.

Costs in dealing with a First-tier Tribunal regarding the company’s VAT position: the company had been pursuing a credit, which it alleged would result in a substantial cross-claim supporting its application to strike out HMRC’s petition. Morgan J felt that the arguments as to whether to allow these costs as a Liquidation expense were “very evenly balanced”, but he chose not to allow them, viewing them as “sufficiently different from the direct costs of responding to the HMRC winding up petition so that it would be wrong to give them the priority which would follow from allowing them as an expense of the liquidation” (paragraph 136).